Understanding the Four Types of Risks
More than any other person, YOU, the entrepreneur must acknowledge and minimize the risk in your life. The question many entrepreneurs like myself will ask is How in the world do minimize, reduce, avoid eliminate risk? First of all let me make it perfectly clear, no one can every eliminate all risks. In life risk is unavoidable. Things will happen in life. What we all strive to do is reduce risk.
The Four Risk Types
- Transferring risk
- Accepting risk
- Avoiding (denying) risk and
- Reducing risk.
Transferring risk is most often achieved by buying insurance and transferring the risk to the insurance company. As a business entrepreneur, you purchase insurance and pay premiums to assist in the protection from a catastrophic loss. Example of transferring risk is creating a Limited Liability Corporation, referred to as an LLC or getting general liability insurance.. If and when you have a business mishap or a business loss, your insurance company will absorb the loss and not your personal finances. Another method of transferring risk would be using third party vendors to manage parts of your work. Examples including hiring a painting company for a project instead of using in-house staff or volunteers.
Accepting risk occurs when you choose not to self insure. This is a viable option when there are small risks in within your business. When the cost of insuring the risk is greater than the risk itself, the strategy is to accept the risk. All risk that are not avoided or transferred are retained by default. Example of accepting risk is skipping the recommended oil change from your car’s manual and waiting until 14,000 miles to get the oil changed. As a car owner you accepted the risk of not getting the oil changed at the recommended mileage and damaging the car’s engine.
Avoiding risk or denying that you have risk occurs when your business chooses not to act on a known risk. Avoiding risk may not always be the most practical option, yet it must be considered when making decisions. Avoiding risks may require losing out on potentially expanding your business, such as purchases supplies, hiring additional staff or even adding other business options.
Reducing risk involves the severity of the loss or the likelihood of the loss occurring. An example of reducing risk is installing smoke detectors in your church or ministry to reduce the risk of fire damage.